Make your money work for you!

Month: January 2016

Most P2P investors start by investing into loans – either loans to people or to small businesses. However, as time goes on, the opportunities offered by P2P portals expand, and one of the newest, which is quickly expanding, is factoring (also known as invoice financing).

What is factoring / invoice financing?

The core idea of invoice financing is to help businesses manage their cash flow. If company A is a small business that bills a big business, company B, then factoring allows company A to sell the bill instantly with a small discount to investors instead of having to wait the full period for company B to pay the bill.

For an investor the chance here is to invest into short term claims, mostly in the ranges of 1 month – 2 months, allowing for reasonably quick turnover with similar returns to other P2P investments. Theoretically, since in this equation company B is generally a reasonably big company, with a good payment history, then risk should also be reasonably low.

Who offers invoice financing?

Currently there are two P2P portals that can be easily accessed by Estonians that allow you to invest into invoice financing. The Estonian Investly, which offers factoring in addition to SME loans. The second option is the Latvian marketplace Mintos that lists investments from different originators. (Currently Debifo, hopefully more soon.)

The process of invoice financing is essentially identical to investing into other P2P investments. You can set up automatic investment settings to make bids, but you can also spend time to manually look into the information provided about the business to assess its reliability.

Recovery process

One of the key issues with P2P investing however is assessing likelihood of defaults happening and how the recovery process works from there on. I asked both Investly and Mintos for a short comment about recovery.

Mintos:Loan Originator monitors all incoming payments and the system tracks late payments. In a case of unexpected payment delay, Loan Originator contacts the Borrower to discuss the situation and to decide on the next necessary steps to receive the full payment. In most cases, the discussion acts as a reminder to the Borrower to contact the Purchaser regarding the payment. If the payment is late and the Borrower does not cooperate, Loan Originator contacts the Purchaser directly to resolve the issue.

Investly: Investly actually enforces a repurchase obligation. There is in depth info about this in their user’s agreement. 6.12.2. If the repurchase term has passed since the due date of the Invoice (Repurchase Term) and the Client has not fully paid the Invoice underlying the Claims assigned to the Investor, the Invoice Seller shall be immediately obligated to repurchase the Claims from the Investor and the Investor shall be obligated to re-assign the Claims to the Invoice Seller for a fee (the Automatic Repurchase Obligation).

How does invoice financing help diversify your portfolio?

One of the key elements of investing is diversification, especially when it comes to P2P investments. However, diversification is more than just having multiple loan/investment pieces, it’s also diversifying across different areas that’s important.

Currently the three key points that factoring offers you are:

Chance to invest into the success of SME businesses

Generally short term investments

Likelihood of acting differently from P2P loans in different economic cycles

However, there are also some potential issues:

Difficult to assess risk (rather new area even for P2P)

Recovery process doesn’t have tested history (yet)

I am personally currently investing into a few Debifo invoices to see how the system works. Since I’m more interested at the moment in adding in short term investments, so factoring could be a potential option here to balance out all the long term 5-year P2P loans that I have in my portfolio at the moment.

If you happen to want to start investing into Mintos, then they have an affiliate program if you wish to support my investments there. Click here.

I recently added both of the Latvian P2P platforms into my portfolio, and I’ve got some questions about my first thoughts so I thought I’d discuss a few things that have stood out to me within the first few weeks.

Loan terms

One of my key expectations for both portals was to have the ability to invest into short(er) term loans. Since my P2P investments in Estonian portals (Bondora, Omaraha, Moneyzen) are rather long deadlined (5 years), then for flexibility’s sake I wanted to invest into 1-6 month loans. This has proven to not be equally easy.

For Twino loan volumes aren’t an issue. Any money I transfer in gets invested momentarily, which is one of the reasons why I’ve added in money twice already. Currently the only problem with portfolio building is limiting your own enthusiasm towards transfering in money.

For Mintos, however, short term loans are in short supply. The first money I transferred in got invested within a few days, but since then it’s been problematic to see any short term loans. I attempted to lengthen the loan terms to 12 months, but that didn’t help much. This means that so far I haven’t added in any additional finances.

Automatic investing

Due to the simplicity of Twino’s product the autobidder is also phenomenally easy to use. I have to admit, they have made a good choice here – since your loans are buyback guaranteed than making automatic investing difficult in any way would be nonsensical. The money gets invested essentially the moment it’s transferred, so I hardly even log on, just glance at the daily reports in my mail.

For Mintos the autobidder to be honest is a bit painful to use. It’s both visually a bit clunky and some of the settings are problematic in terms of making sense. I get that this is an issue when you have multiple loan originators, but the bigger the market grows for them, the quicker they should work on making the autobidder smoother and more understandable at a glance.

Reliability

This is the question that everyone would like an answer to – who is more reliable of the two. I have no clue how exactly to check for this, but I suppose we should dig out the financial reports for both for Investeerimisraadio.

In terms of volume Mintos has clearly funded more lians (12M+), while Twino is at 6M+, one lists consumer loans and the other real estate backed loans and car backed loans as well, so the total amounts are clearly bound to be different.

I’d say if your tactic is long term investing then there probably isn’t much of a functional difference in the returns, but a slight difference in the experience. However, if you’re wishing for a short term investment that would be quicker to exit, then Twino is slightly in the lead for me at the moment.

Since the beginning of December Bondora has allowed investors to use third party API applications to invest into loans. In theory this is an amazing opportunity – people who are capable of analysing the dataset to create investment models can use this opportunity to achieve higher returns and manage their risks in a way a passive investor is just not capable of doing. However, the reality at this moment is a bit different.

Lack of available tools

So far the only API client that has been publicly released is the Beeplus client created by Jarmo. Hopes were that there would be multiple clients competing, but this has proven to not be the case. (I tried to contact LendTower who talked about releasing a client, but I didn’t get an answer from them.) I can only guess what the reason for lack of public clients is, but what probably impacts it is:

programming a usable client takes time/effort/skill

the process of how the API works isn’t final (sandbox issues, documentation issues), so developers are still waiting to work on it

people would rather not be responsible for other people’s money (mistakes the application make could be blamed on the developer)

there is no chance of monetisation at this moment (either due to people not being willing to pay or lack of usability for API at this point)

people are only sharing the clients with close friends

I asked Jarmo, who created Beeplus a few questions, since I know a lot of people are using Beeplus to invest via Bondora.

A bit about yourself (who are you, how long have you been investing?)

I’m an experienced software developer with some spare time in my hands (happens sometimes, rarely). I have also been investing small amounts at Bondora for a few years now.

What motivated you to create Beeplus?

When I saw an article about Bondora creating an API at their blog, I wanted to create something for myself to invest better at Bondora because their Portfolio Manager is very limited. After I started playing with the API in the sandbox environment I saw an opportunity to not just help myself, but also others like me and created the BeePlus. This is how it all got started essentially.

Who is the typical Beeplus user? (Do you have any user stats to share?)

I haven’t conducted any interview processes yet among BeePlus users, but deriving from some communication I’ve had with them, I’d say that currently big part of them are early adopters and more technical users. I haven’t made (almost) any PR to promote BeePlus and all current users have somehow found BeePlus. To be honest, I don’t know how. Currently BeePlus has 50+ active investors (meaning they participate daily bidding on Bondora’s auctions) and from the end of November (time when BeePlus went live) BeePlus has made 5000+ bids on behalf of investors through Bondora’s API.

Is Beeplus a hobby project or will you monetize it at some point?

Currently BeePlus has been a hobby project, but I’ve had some thoughts about making some money with it as well by introducing a freemium model (meaning that core functionality is free, but premium functionality will cost a little bit of money). It’s not going to happen in near-future if ever though.

What is best about using Beeplus? What are you planning to add in the future (or is Beeplus now ‘ready’)?

Best of BeePlus is that it is user-friendly (hopefully), because UX (usability) has been one of the goals since from the beginning. Security and privacy is also very important to me (for example many users ask for functionality, which would require BeePlus to query about investors available balance at Bondora’s account, but I’ve not done these yet due to privacy reasons – it might change in the future though). BeePlus is far from ready – I have a pretty long TODO list for it. I’m going to add some investment limits (monthly and/or daily) to the rules, secondary market support and so on. Functionality list is endless and I’m always hearing out all the ideas users might have as well, but at the same time I want to keep BeePlus simple and easy to use (UX, right?), which means that not everything will be implemented in the end.

Any wishes in terms of usability from Bondora’s side?

Bondora’s API has not been live long and that’s why there might have been many problems among API documentation and bugs in the system. Hopefully it will get better. However, there is a large problem of Bondora having lower priority for all API users compared to their own Portfolio Manager, which they are not planning to change. For now.

As you can see, luckily there is one option on the market written by someone who personally also invests and has been kind enough to share their work on the open market. However, at this point there are a few problems with how the API functionality works overall, that I’d like to address that I hope will get fixed in the future.

Prioritisation of bids

At this moment, the priority for bids is as follows:
1. Investors (likely to be institutionals) who bid via API to fill up whole loan
2. Passive investors using Bondora portfolio manager
3. Investors who bid via API

There are many key issues here. Firstly, at some point when institutional investors come into play, then we will be seeing more and more (or well, not seeing) loans not even hit the primary market. If we talk about a fund that wants to invest 2million/year then they are definitely not going to be investing into small pieces of loans.

At this point we do not have institutional investors on the market yet (as far as I know), but it will be interesting to see how it will play out. At one point, I’d say it might be a good idea to gather up your friends, pile up your investment money and start buying whole loans. Provided that you can pile up about 100K euros with your group of buddies this would probably work reasonably well in terms of diversification.

The second problem is the low priority of API bids, which is actually making the API rather useless at the moment. The whole point of the API being the idea that you can bid on specific loans that fit your investment model – however, since you are currently mostly bidding into loans that portfolio managers do not managed bid full, then trying to implement any strict filters for your loans doesn’t really work since you just don’t have the volume to choose from. This is especially true when we start thinking about a more conservative portfolio which at this point is considered by most to be Estonian loans AA-C.

The easiest way to fix this would be to reserve a certain percentage of loan total value to API bids. The reason why API bids are still getting AA loans at the moment for example is because the portfolio manager bids are mostly small enough that they do not fill up loans with higher values (you can also see fluctuations at points of the month when portfolio managers are “empty”). However, this will not last long since with every 200 loans in a portfolio the bid size increases – meaning in a few months more loans would likely be filled up by the autobidders. When visiting Bondora Pärtel mentioned that they would be looking into this, I hope if the situation does get problematic some sort of a fix would be made to the priority list (especially if other entities enter the bidding priority list). Currently as it stands, you cannot use the API for much other than a glorified country picker unless you have very strong models and are interested into investing into higher risk loans.

My bidding experience

Ever since the start of December I have invested 95% on my money via an API application, and a few loans I have picked manually. I am using an application that my husband built and as mentioned before, I am sharing it with a few close friends who have asked for it (since I don’t really want to be responsible for errors/support to an extent a public application would need). I am not using any complex model since I haven’t had time to develop anything but I am not ruling it out in the future, provided I have some time to analyse the dataset with the help of some analysis programs (not seeing this happening any time soon).

As it stands, for the whole month of December both my business & private portfolio used the application to bid. For my business account I managed to invest into 100+ Estonian AA-C loans. Mostly of course the result being B&C loans, since they are generally big enough, and there are enough of them to go around for everyone.

Starting January I set my private portfolio to only invest into Estonian AA & A loans, as I am slowly starting to withdraw money but I am still planning to keep a small conservative portfolio running. So far, it seems like I get an AA or A loan every 3-5 days. This is about the pace that I expected and will help me keep the pace of withdrawing all deposits into my private account within two years an reducing the portfolio size steadily.

For my business account, at the moment it seems like there is enough loans to go around if you are not investing at insane rates. Getting into at least 50 EST AA-C loans seems entirely possible, and for most private investors that is a perfectly reasonable level of diversification. As I said before, as the portfolio managers start bidding more or as institutional investors enter the market the situation might change, but if you don’t want to use very complex models you can get the money out. However, using very complicated predictive models at this point is rather impossible, however at least the clients are being built (if only secretly at this point), that in the future they will hopefully be of much more use.

Since I’m been moving my P2P investments under my company I’ve had some people ask for a few details about creating a business in Estonia and the limits of what you’re able to do with one. So, a master post on some relevant details about starting a business in Estonia and things to keep in mind if you wish to use it for investing.

What do you need to start a business?

For Estonian citizens there are no requirements for starting a business other than being of age (though you can start one with the help of your parents while underage as well.)

For someone who isn’t Estonian, but wants to start a business in Estonia, the easiest way of going about starting a business would be to firstly gain e-residency. E-residency allows you to register an Estonian company online and sign documents digitally. For more info about e-residency you can read on the official state page about it. (For taxation check with an expert, just in case!)

The process of starting a business itself is rather easy and takes less than 20 minutes, you can do the whole process online, and it generates all the necessary documents for you. You need to pay the <200 euro state fee for it, create a bank account for the business and the official registration takes just a few days.

The two main options for starting a business are creating a public limited company (AS) or a private limited company (OÜ). Nowadays pretty much anything you would want to do as a business in Estonia is possible with an OÜ (unless you plan to IPO one day). OÜ does have a capital requirement of 2500€, but you are allowed to start a business without it (which is what I did a couple of years ago); however, you cannot pay yourself dividends until the requirement has been met. Other details you might need to know about starting a business are explained rather well on the eesti.ee page.

Important things to keep in mind

Firstly, once you start a business you need to know bookkeeping. If you start a business that doesn’t pay out a salary and doesn’t need to pay VAT then you mostly only need to just report your finances once a year. If you plan to have other business activity (will explain later why), you might need to declare more documents on a monthly basis, so it’s good to look into it. I’ve used a bookkeeper from the start (because I’m lazy), but it’s useful to know how the paperwork works. I switched bookkeepers when I started moving P2P investments under my business since it’s a bit more complicated than some other processes but my current bookkeeper is great (and can do bookkeeping in English, if anyone needs a recommendation!)

Secondly, once you start a business then you cannot use it for only P2P investments. If your main income is from giving out loans, then you will become subject to the Credit Institutions Act, and another law, which will go live in March, the Creditors and Credit Intermediaries Act. Now, there is still a lot of confusion about the second act, and I actually wrote to the Financial Supervision Authority to make sure the new law doesn’t force me to register my business or get any kind of permit. The main key point being – your main income must come from something else, otherwise you will be forced to follow the Money Laundering and Terrorism Financing Prevention Act, which as you can imagine is impossible if you invest through P2P to private individuals.

What all those scary-named acts mean in the end, is that you need to have some other kind of main income for your company. This means a long term plan about your business – do you want to sell a product or a service? Would you want to buy stocks, or have rental apartments under the business? Sell counselling services? For me this wasn’t an issue since my company has multiple sources of income. If you don’t have that though, then you need to think through your plan.

Benefits of investing as a company

However, if you do have alternative income, then there are multiple benefits to having your investments, mainly P2P (but also real estate) under your company account.

Firstly, Estonia has 0% company income tax until distributions are made. This means that you can keep the money growing for years and postpone tax obligations until you pay yourself dividends. This means no matter how much interest you make via investments, you start paying tax on the money only once you make distributions, the only thing you need to do is report it like the other income that your business has.

Secondly, you are allowed to discount defaulted loans from your portfolio. Now, since you aren’t taxed on the interest, this is kind of a moot point, but overall, once a loan becomes unlikely to ever pay, you are allowed to count it as a loss (and deal with the unrealistic interest claims in your bookkeeping). Some P2P portals have buybacks anyways, then it’s irrelevant, but for example, for Bondora doing it once every couple of years should be enough.

Thirdly, since you must have some type of main income you get to invest pre-tax money, this means overall bigger growth in the long run, Whether you’re selling something or providing a service for clients, the difference in numbers when investing residual income from your main income versus investing as a retail investor is immense. (The difference depends on the country, in Estonian otherwise it’s a flat 20% tax on P2P income every year, without being able to discount any losses; I know in some other European countries the tax code is a bit more forgiving.)

*If anything seems confusing or you see any errors in details, please let me know!

So far my P2P investing has been limited to Estonian portals since I just didn’t need to expand into that many sites (you want to reach reasonable diversification before adding in other portals). However, since my portfolio is growing and there is only so much money I want to invest into Bondora and only so much I can invest into Omaraha (and the tiny amount that Moneyzen can provide), expanding became rather necessary. So, off to Latvia we go – Twino and Mintos.

Setting up the accounts

Honestly, the setup process for both was rather identical, just the document verification was in different order. I could make the accounts and start investing within the same day already. I created business accounts so I was happy that there wasn’t much hassle with the additional documentation. The bank transfers arrived the same day as well, so good for being very smooth. While I’m testing them I’m investing equal amounts into both, started off with 250€ each, and planning to increase at a similar rate.

Strategy

Now, this is where I’m planning to act a bit differently from my Estonian portfolios. I would rather not keep the loan terms super long, which means that for both of the portals I set the autobidders to bid for 1-3 month loans with only buyback guarantees. This means that in case of problems arising it’s reasonably easy to make an exit (hope I don’t have to regret saying this!)

Also, while I do have some concerns overall about buyback guarantees then if you look into the overall math of it, it’s somewhat reasonable on loans that are essentially payday loans. To benchmark – an Estonian payday loan company releases bonds every year for about 12% to collect investors’ money. What P2P investors are doing is essentially the same – with the process actually being cheaper for them due to less legal expenses. Of course there is always the risk of economic downturns and all other P2P related risks, but those can never be fully eliminated.

First thoughts of Mintos

Overall I’d say, firstly, that the process of registration was easy enough and most of the site is rather intuitive to use. With the notable exception of the portfolio manager that I think could use some work since firstly when activating it, I couldn’t figure out what was wrong, but apparently the LTV value is causing some issues? Also, hiding away the additional terms of things such as buyback seems rather counter intuitive and a waste of time to make people actually look for it. However, I’m looking forward to the first loans starting to make their rounds. While the buyback guarantee is good, then it activates rather slowly so it still causes cash drag, and the buybacks don’t all function as Twino’s – you don’t get to keep the interest (I’ll have to look into that a bit more, picking between the different loan originators seems like an intriguing task since they’re all foreign companies.) At this point however, Mintos has a longer history than Twino and people have had rather positive experiences with them. (The fact that they’re doing well is evidenced by the dropping interest rates as well.)

*Correction: seems like the buyback works with interest as well:

First thoughts of Twino

With Twino first impressions of usability are also rather good. I like the simple and logical design, the portfolio manager was very intuitive to use. However, at this point they are still very new, and despite the loan volumes they are showing it’s a typical reliability issue that new portals suffer from. Also, as with Mintos some of the countries they service might be of somewhat questionable value and economic sense, which is something that only time will probably tell. However, they are part of a large corporation (FinaBay), which would imply that if things started to go wrong, they would have to go very wrong for the mother company as well. In addition to this some people might find Twino morally objectionable due to the fact that you’re investing into payday loans, so that might be problematic for some. Overall, looking forward to how things get moving.